Believe those who are seeking the truth. Doubt those who find it.Andre Gide

Tuesday, April 3, 2012

The Trend is the Cycle

Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia) appear to have made a very interesting discovery. Evidently, there appears to be a very strong link between two much talked about phenomena: job polarization and jobless recoveries. Their paper is available here: The Trend is the Cycle: Job Polarization and Jobless Recoveries.

Job Polarization

Job polarization refers to the recent disappearance of employment in occupations in the middle of the skill distribution. To display this phenomenon, the authors decompose employment into occupational groups and then delineate occupations across two dimensions: cognitive vs. manual, and routine vs. non-routine. (These labels are largely self-explanatory, but refer to the paper for details.)

Evidently, these classifications correspond to rankings in the occupational income distribution. Non-routine cognitive occupations tend to be high-skill jobs, and non-routine manual occupations tend to be low-skill jobs. Routine occupations--both cognitive and non-cognitive--tend to be middle-skill occupations. Here is what has been happening to employment shares across these categories:

Percent Change in Employment Shares by Occupation Group

The figure above shows that across three decades, the share of employment in the middle of the skill distribution appears to be disappearing. Prime suspect: routine biased technological change (e.g., think of ATMs replacing bank tellers).

Jobless Recoveries

Jobless recoveries refer to the unusually slow rebound in the employment dynamic following the end of a recession (when GDP is growing). Here is the typical pattern one would have observed 30 years ago (and before):

The x-axis is centered at "0," which represents the trough of the recession (using NBER dating). The data is plotted for 2 years around the trough date. The shaded region represents peak-to-trough. The y-axis plots the percent change in employment relative to its value in the trough. The figure above shows the rapid recovery in employment following the trough of the recession.

The dynamic above is to be contrasted with what has happened in the previous 3 recessions (early 90s, early 00s, and most recent). Here is what the picture looks like following the most recent recession:

Yes, but what's the link?

So far, this all very interesting, but not very new. What is new is how the authors link the two phenomena.

The following diagram depicts the same employment dynamic, except with employment decomposed along three dimensions: [1] non-routine cognitive, [2] routine, and [3] non-routine manual (same as the polarization graph above). Here is what we see for the 1982 recession:

In this episode, the recovery in employment was strong across all occupation groups. In fact, the non-routine occupations appear to have grown throughout the recession! The key is the strong recovery in the non-routine class of occupations. Roughly the same pattern is evident in the 1970 and 1975 recession as well.

But now let's take a look at the more recent employment dynamic:

Here, we see hardly any movement at all in the non-routine occupations, but a significant and persistent decline in routine occupations. The relative weakness in routine occupations is evident in the 1991 and 2001 recessions as well.

The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.

The Trend is the Cycle

Consider now how the employment ratio behaves across these 3 occupational groups over the sample period 1967-2011. Here is the non-routine cognitive group:

Here is the non-routine manual group:

And here is the routine group:

This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion.

Moreover, because these routine jobs are associated with the middle of the income distribution, the data here suggest that job polarization is not a slow, secular phenomenon--it is intimately tied with the business cycle.

Theory

The authors employ a Diamond-Mortensen-Pissarides model to show how routine biased technological change can lead to job polarization, and how recessions can accelerate this process. The modeling framework is a good choice, in my view. (In particular, I have a hard time imagining how an IS-LM or NK model can be used to understand this phenomenon--but maybe I just lack imagination!)

The work here is still very preliminary, of course, but the results look promising. Needless to say, it is hardly the last word on the subject. But I am confident that talented young economists, like Nir and Henry, will continue to shed light on the matter. Well done, gentlemen. Keep up the good work!

28 comments:

I'm confused about something, and don't have time to read the paper. Non-routine manual are low-skill jobs? That doesn't sound quite right. For example, carpentry is manual and non-routine, and that's a high-skill (or at least middle) job. Can you clarify that a little?

In this delineation, non-routine cognitive occupations include managerial, professional and technical workers, such as surgeons, construction managers, nancial analysts, computer programmers, and economists.

Essentially the 'knowledge workers' are making themselves redundant, if not obsolete. Rather they have made themselves redundant already. Didnt they see the axe that they sharpened so much and so well, coming on their own head?

Thanks David. It makes sense, I probably would have flipped the words, but I get what they're driving at now. This is definitely some interesting thinking, and I need to spend some time thinking about it.

David I don't see anything new here. We are essentially looking at the transformation from manufacturing to personal services.

If you look at fraction of employment rather than absolute levels then you see that this has in fact been proceeding at the same rate since about the 1950s or so.

Even in the charts you posted you can see the routine group trending ever so slightly down from the beginning but note that it is trending down against an explosion in labor supply as the baby boom generation came of age and women entered the workforce.

So relative to the surge in the top two charts the losses are not particularly exaggerated except for the 2008 rececession and indeed we have seen surprising strength in the routine sector since then. Even though it looks flat it is flat relative to flatness in the other sectors, where in past years it always performed far worse than the other sectors.

I think the reason why the big adjustments take place during recessions is because that's when the errors of entrepreneurial (i.e. plan making under uncertainty) are revealed. At least, according to Austrian theory, that's when it happens.

Btw, it's hard to be a neoclassically trained financial economist who does traditional work (that inflation paper I sent you a long time ago will finally be published in Economics Letters, btw) who is also pursuing Austrian econ. It's like living two lives. Weird.

However, check out this chart with logs of the Manemp to Payems, which unlike population controls for the rapid increase in the employment population ratio due to working women and prime age baby boomers.

Ok for some reason that totally didn't work. Anyway Log(Manemp/Payems) will show a downward trend since 1950. A little bit of acceleration after 1990 but then a marked deceleration during this recovery.

This classification of occupations seems extremely dubious (e.g., why is a bartending job non-routine but a mechanic job is routine? Or, for that manager, why is a b2b software salesman job routine but the manager of a McDonalds is non-routine?). And that in turns makes me worry about whether these results are just an artifact of job classification...

well, I think the result of the paper is solid, and quite related to the change the labor productivity. What is amazing is the ciclical performance. On the other hand, this recesion is not comparable with all others. Some very big shocks have operated, and is possible that the dimenssion of these has play an important role in all variables.

"The figure above shows that across three decades, the share of employment in the middle of the skill distribution appears to be disappearing. Prime suspect: routine biased technological change (e.g., think of ATMs replacing bank tellers)."

To display this phenomenon, the authors decompose employment into occupational groups and then delineate occupations across two dimensions: cognitive vs. manual, and routine vs. non-routine. china manufacturing

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